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Thursday, February 25, 2016

The great deflation and what comes next

I haven't written anything since the election on October 19th. I felt it pointless, Canadians were too obsessed with false victories in the political spectrum. "Defeating Harper" and the sort even though really the public has just once again been manipulated into doing exactly what was desired as I wrote about during the federal election breakdown 4 part series last year. Such as it is the honey moon has worn off and no amount of fancy public relations can hide the effects of the great deflation, and new bosses that look a lot more like the old bosses each and every day.

Look around folks, just.. look around.

The world is sinking into chaos.

Here at home Canadians are bickering about pipelines and other useless drivel as the elephant in the room goes unmentioned. The "west vs east" divisive lines I don't think have ever been so prominent in my life time. In many extreme "right-wing" circles there's even been talk of separation; silly of course but still, it's new. Or old, depending how you look at it. Articles like "It's raining schadenfreude on Calgary and Alberta" actually exist. The more the economic situation deteriorates, the worse the baseless finger pointing will become.

"It's the NDP". "It was the Conservatives". "It was Justin, and his hair".

You all need to just stop and think for a minute.. just what is it you expect to happen?

The great deflation is going to be a very trying time for a lot of people. Here is a portion of what I wrote early last year on the great deflation:

The majority of the world economy is now supported by near zero, zero, or negative interest rates. Seven years on from the peak-oil induced "great recession" central banks are finally out of ammo. Inevitably this situation can not last forever and with the Saudi's pushing the collapse in oil price the stage has been set, and in fact the play is already in the first act, for deflationary spiral the world has never seen the likes of before because the world has never seen a fiat asset bubble of this size before.

The expected benefit economists are expecting from lower oil and gas prices are not going to materialize as the middle class which is the primary driver of this trend has been crushed by unaffordable consumption and debt accumulation. The easiest path for this excess wealth to take is towards paying down debt which in itself is inherently deflationary and will only contribute further to the deflationary spiral we've entered.

The artificial deflation of oil is having a direct effect on the outlook for oil related employment and income which both Canada and the U.S. have been completely reliant on for wealth generation. The entire myth of the current "U.S. recovery" which Canadian economists are banking on is essentially based on the economic performance of the shale oil industry prior to the collapse in price (you'll remember the latest U.S. recovery narrative was originally about the boom of shale oil) which is no longer valid. Without the high incomes oil related jobs provide the unaffordable asset bubbles become completely unbalanced. This is why the Bank of Canada is citing mitigating the effect of low oil prices (lower inflation) as the reason for lowering interest rates while effectively ignoring the increase in inflation high oil prices represent. They are selectively interpreting the situation to service their own needs of maintaining the credit markets.

No amount of low interest or free currency can ever hope to make up for the loss in energy bounty as a result of peak oil and the focus on low EROI energy production though as currency is not wealth itself but the representation of wealth, it has an end of life and this is where C51 becomes very important for the status-quo.

It's now one year later, was I right?

The divisive environment in Canada is being driven, and I believe purposely fomented, on a false pretence; that if only we will build pipelines, if only people will stop talking badly about the oilsands, if only, the Canadian economy will come roaring back to life. That the job losses will stop, and the jobs return. It keeps the focus, and the arguments, and the finger pointing around a single topic: pipelines, and not say the more important topic we should be talking about: are the oilsands even viable to produce at any price?

Low oil prices has simply provided an excuse to speed up this process and not take the blame. What little blame has been remaining and not directed at the Saudi's has been kindly redirected towards the new NDP government by the always helpful and awfully plentiful "grass roots" movements that for some reason always seem to have ties back to industry.

It should be noted that all around the world the oil situation isn't exactly good. The deal to "freeze production" between the Sauds and Russians should be of particular interest for those who understand the geopolitical game at foot here. As I wrote last year an informed Twitter follower informed me that the Saudi's were not working against the Russians, but were working with them. This new deal, which is not a deal I should point out between the Saud's and so-called 'Saudi-America', continues to fit the grand story of global divestment out of the USD. Divestment which is becoming so noticable that even the National Post wrote something about it.

It is a chilling statement from an expert on both gold and China. But he is speaking the truth: In a G2 world (the United States and China), he who is the piper calls the tune, and China holds a US$2-trillion mortgage on the United States and is not happy. This country, along with others that lend money to the United States, such as Saudi Arabia, will determine the value of the U. S. dollar and gold. And they have spoken. They are not buying more U. S. treasuries and are buying gold as a new asset class. China announced that it was doing so quietly, and recent reports are that the Saudis and others have been buying bullion and hocked gold jewellery from around the world.

The only way is up for gold prices because the United States, which backstops the International Monetary Fund, the world's lender of last resort, has had to become its own lender of last resort.

Washington has cranked up the printing presses in an unprecedented way, replicating the behaviour of its spendthrift corporations and consumers. This year's budget is US$3.5-trillion, bigger than any in history.

And as Ing points out, the "bi" in this bipolar global economy is China. Beijing has not only started to hoard gold but has continued to talk up a new reserve currency concept to replace the U. S. dollar. The only reason the Chinese and others don't dump U. S. dollars is because it would be like shooting themselves in the foot.

Inflation, on top of excessive money supply dilution, will (unless mitigated by growth or stoppage) reduce the dollar's value. Ing estimates that the printing of money to bail out banks, autos and the U. S. economy will create a catch-up in gold bullion prices: "Gold should be US$9,000 an ounce to cover the [current and projected] U. S. monetary base," he says.

China has become the world's fifth-biggest gold hoarder, in addition to being the world's biggest gold producer (through its government-owned mining companies). I also suspect that China is behind the political sabotage in Mongolia, to its north, which has for five years prevented Ivanhoe Mines of Vancouver from producing gold and copper from its massive discovery.

Clearly, China also has been dis-investing from the U. S. dollar by getting slowly into hard assets (stock, commodities or ore bodies), which I have written about. This concerns Washington, which is why Hilary Clinton, U. S. Secretary of State, made her first state "house call" in Beijing to make nice with America's first mortgagor.

At that time, and publicly, too, China warned the United States about its dollar woes, while suggesting a basket of currencies to replace its pre-eminence. These scary pronouncements were followed by an announcement in Washington a few weeks ago that there would be a massive U. S. Treasury buyback of U. S. bonds. Put another way, the Chinese and others aren't buying anymore so the surpluses are being mopped up by putting more on the taxpayer tab.

It is an irreversible trend that China and others will continue to disinvest and diversify out of U. S. dollars, and that inflation will further impair the U. S. dollar's value. That's because the U. S. monetary/economic rescue is simply Washington's version of the excesses and over-leveraging that led to the need for a rescue in the first place.

Speaking of gold, Canada just recently sold half it's reserves. Yes, that's right. Half. So whatever the government "deficit" is you're hearing about these days, add half our gold supply to it.

“The producers of those high-cost barrels must find a way to lower their costs, borrow cash or liquidate,” the minister told a business audience in Houston during a speech at the IHS Ceraweek event on Tuesday.

“It sounds harsh, and unfortunately it is, but it is the most efficient way to rebalance markets. Cutting low-cost production to subsidize higher cost supplies only delays an inevitable reckoning.”

You must understand what he is really doing: he is calling North American oil production out on it's bullshit. And worst still he shows the real target: the banks. Borrow more, he says. But he knows these oil companies can not borrow more, and that their hedges are now expiring, and that the defaults are about to start rolling in.

Peak oil.

I've seen a lot of people talking about peak oil lately. It's pretty amusing. Apparently we beat it. Because the world is producing excess oil apparently all the peak oil theory is junk. Nevermind that were producing much of it at a loss. Nevermind that for almost an entire decade now we've been talking about "the recovery". Nevermind that for the first time in modern economic history banks around the world are having to introduce negative interest rates which our own BoC has even discussed. Just never. Fucking. Mind.

That will be the first time since 1986 that upstream investment has fallen for two consecutive years, the agency said, warning that the collapse could be storing up problems for consumers further down the track.

"It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not too distant future," said IEA Executive Director Fatih Birol on Monday.

So. Who can guess what comes next after the great deflation? Anyone? Bueller?

Once the defaults really get rolling and work their way thru the banking system all confidence in oilsands and shale production will be destroyed. The levels of investment weve seen will not be returning. Ever. EVER. I really want that to sink in. When I discussed Alberta's new permanent reality, I really did mean permanent.It will be when the damage is done that the Sauds, along with Russia, and their partner China will finally give North America exactly what we've been asking them for: they'll turn off the taps. And all hell will break loose. This is how they will put the final nail in the coffin of the U.S. dollar.

By turning off the taps the price of oil will rise very rapidly, lacking it's own production North America will be forced to buy foreign oil in whatever currency they choose. They will not be choosing the U.S. dollar. This will also be the start of true hyperinflation in the U.S. as the energy shortage quickly adds pressure to deflation and they are forced to print more and more currency (borrow it from private banks at interest that is) to simply get life's necessities.

It's not a pretty picture but unless the people all around the world stop pointing fingers, making baseless accusations, and petty demands and stop just long enough to realize we've all been had, these forecasts, like my previous ones, will quickly be upon us. Just look around.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

7 comments:

You've written a very provocative article here, and by provocative I am not using the insulting context, I am saying this really get's one thinking about what has been going on as of late- where it's headed etc.,

I don't want to get to caught up in fear, because, it doesn't serve any real or practical goal.

It's better to be as prepared as one can be. So that reduces the fear factor.

Richard: I suspect the carbon bubble is the planned replacement to keep this whole charade moving along,Any thoughts on that?

I agree and wrote about that here: http://www.canadiantrendsblog.ca/2015/09/elxn42-breakdown-part-1.html

These facts might be forgiveable if their usage to invest in the future was genuine but like most big-money schemes this one is likewise false. The carbon tax outright will likely over time simply end up in general revenue providing yet another tax base for expansionary monetary policy which if the banking system is not to collapse the government will need to engage in. The carbon trading market on the other hand is just the next market bubble oriented around the only thing more plentiful and common than printed currency itself and is the only financial bubble that can hope to exceed the global bond bubble.

I think that you’re right and unfortunately, it’s not worth expecting any major positive economic changes. I also think that the price for oil and gas prices will not get any lower and moreover, I guess it will rise and of course, that will not work for Canadians. However, I think that the Canadian economy is quite stable now. According to the recent surveys, most Canadians feel themselves financially secured and don’t have a need to turn to the company to meet expenses.